UNIT 5

ALLOWABLE DEDUCTIONS

5.0 Introduction

In order to arrive at the taxable income, we take allowable deductions into consideration.
Expenditure which is of a capital nature does not qualify for a deduction in determining
taxable income unless specifically included in Section 15.This unit discusses some of the
allowable deductions.

5.1 Unit Objectives

After studying this unit, you should be able to:-

 explain the general deduction formulae
 state the specific allowable deductions
 explain the prohibited deductions

5.2 Section 15(1)(a) – Exchange Rate Variations

Owing to a variation in the rate of exchange of currency between Zimbabwe and any
other country, the amount actually paid in Zimbabwean currency differs from the amount
of the liability that had been incurred prior to the variation in the rate of exchange the
amount to be deducted shall be the said amount actually paid in Zimbabwean currency.
If the incurring of the liability and the payment thereof occur in different years of
assessment, effect shall be given to the increase or decrease in the liability in the year of
assessment in which the amount was paid.

5.2.1 Section 15(1)(b)

In a case where a person earns income from trade and investments and income from
employment any amount allowed to be deducted in terms of this section shall only be
claimed in respect of the income to which it relates.

5.3 Section 15(2)(a) – General Deduction Formula

The deductions allowable shall be expenditure and losses, to the extent to which, they are
incurred for the purposes of trade or in the production of income except to the extent to
which they are expenditure or losses of a capital nature.

 Expenditure and losses does not refer to net loss as reflected in the profit and loss
account of the taxpayer.
 It is not limited to cash outlays but would include losses such as pilferage (theft),
breakages, destruction and so on.
  To the extent to which gives room for apportionment. Where expenditure and losses
are incurred partly for business and partly for private or partly capital and partly
revenue, apportionment arises. The apportionment must be fair and reasonable.
 Incurred means that there is a legal liability to pay. Such expenditure is deductible
from income even if payment occurs only at some later date.
 For the purpose of trade means for the purpose of enabling a person to carry on and
earn profits in the trade. The ordinary recurrent expenses of business, such as trading
license fees, audit fees, rates, secretarial fees, insurance premiums, business
subscriptions and advertising costs will usually pass the test. Expenditure for the
purposes of trade may be categorized in two ways:

o Designed expenditure, which is money voluntarily and designedly spent by

the taxpayer for the purpose of his trade and

o Fortuitous expenditure, which is money involuntarily spent because of some

mischance or misfortune, which has overtaken the taxpayer. A deduction is
not allowable where the expenditure, which though arising out of the manner
in which a taxpayer conducts his trade, falls upon him in his capacity as a law-
breaker rather than as a businessman, for example traffic fines, customs fines
or parking fines.

 Capital nature – in the same way as accruals of a capital nature are generally not subject
to
income tax, expenditure and losses to the extent that they are of a capital nature are
not
deductible from income. In trying to draw a distinction between revenue and capital
expenditure Judge Innes C J brought up the following valuable dictum in C.I.R. v
George Forest Timber Co. Ltd 1 S.A.T.C. 20:

“Money spent in creating or acquiring an income-producing concern must be capital

expenditure. It was invested to yield future profit and while the outlay did not recur,
the income did. There was a great difference between money spent in creating or
acquiring a source of profit, and money spent in working it. The one was capital
expenditure, the other was not …”

Revenue expenditure is the cost of performing the income – earning operations and costs
of
merely maintaining the operating income – earning structure. Expenses which are
necessary for the performance of the business operation, or expenses which are attached
to the performance of the business operation by chance or expenses which are in good
faith incurred for the more efficient performance of such business operations, are all
deductible provided they are so closely connected with the performance of the business
operation that it would be proper, natural or reasonable to regard them as part of the cost
of performing the operation.
Some types of expenditure do not fall within the general deduction formula in paragraph
(a) above because, for example, they are of a capital nature, or they are not incurred for
the purposes of trade. The following paragraph specifically provide for deductions.

Activity 5.1
 Most of the allowable expenditure falls under the general deductions formula,
Section 15
(2)(a). List 10 examples of such allowable expenses.

5.3.1 Section 15(2)(b) Repairs

Repairs refer to the restoration of worn out parts or renewal of something that has
become worn out by its use in business. Expenditure in the form of repairs to articles,
implements, machinery, premises and so on used for trade are allowed as deduction.

Repairs resulting from letting of property are also allowed even if the property has ceased
to be let and no income accrues in that tax year.

Of importance here is the fact that repairs are not the same as improvements.
Improvements are considered to increase the value of the property significantly and,
therefore, such expenditures are of a capital nature. Thus, improvement costs are not
allowed as deduction in arriving at taxable income.
The meaning of the word “repair”

 The word pre-supposes that the original structure deteriorated (for example the
removal of sound red tiles and their replacement with black tiles would not be a
repair)

 A repair involves the renewal of a part of the whole. For example, the installation of
a new engine in a motor vehicle.

 Substantial reconstruction or improvement does not constitute repairs, even though

the work may have avoided effecting repairs which would otherwise have been
necessary, that is the notional repair content of an improvement is not allowed.

 If repair work undertaken along with improvements can be separately identified, the
repair costs are allowable. Please note that notional repairs are not allowable.

 The use of new material does not rule an expense out of being a repair, if the purpose
of the work is to restore the asset to its original condition as distinct from making an
improvement in form, character, durability or performance.

Repairs incurred prior to the article or property being brought into use are capital in
nature and the cost should be added to the asset for the purpose of calculating any capital
allowances where applicable.
5.3.2 Section 15(2)(d) – Lease premiums

This section is complimentary to section 8(1)(d). Lease premiums are allowed as a

deduction in the hands of the lessee if the assets being leased are used for trade purposes.

The allowance for each year (note difference from Section 8 (1) d) is the amount of the
premium divided by the period of lease or 10 years whichever is less.

If no period is stated in the agreement, then 10 years is used.

A premium for “knowledge” is excluded because in most cases no period is stated in

these agreements. The Commissioner’s discretion is applied but the deduction should not
be less than 1/10th of the premium.

Where the lease can be extended for a further period, then for the purpose of calculating
the allowance only the initial period is used.

In any case where the right is not used for the purpose of trade throughout the year the
allowance is proportionately reduced. The allowance can be apportioned between
business and private use.

Where taxpayer acquires ownership of the land, building and so on, then from the year of
assessment following that in which he acquires ownership, the allowances shall cease.

Example
X leases premises from Y for 15 years and the lease commences on 30 June. X pays a
premium of $10 000 and a rental of $6 000 per month (no period is stated). How much of
the premium is the allowed over the lease period?

Solution
1st year (6 months only) 10 000 x 6 months
10 x 12months

= $500

2nd year to 10th year (12 months each) $10 000 x 12 months
120

= $1 000 annually

11th year (6 months) 10 000 x 6 months

120

= $500
5.3.3 Section 15(2)(e) – Lease improvements

This is complimentary to Section 8 (1)(e). If the lessee has an obligation to effect

improvements on the property being leased, the value of improvements is allowed as
deductions in his hands. Refer to Section 8(1)(e) for the conditions and so on. The
deduction is allowed in installments over the portion of the lease period that has not
expired from the date the improvements are brought into use.

Where the taxpayer acquires the ownership of the improvements in respect of which an
allowance has been made, then from the year of assessment following that in which he
acquires such ownership he shall cease to be entitled to the allowance.

5.3.4 Section 15(2)(g) – Bad debts

The section allows the deductions of bad debts. Bad debts rank for deduction if:-
 the debt is due to the taxpayer
 it is proved to the Commissioner’s satisfaction to be bad by indicating steps taken to
try and recover the debt and why it is being considered bad.
 the amount of the debt has been included in income in the current or in any previous
year of assessment and
 the amount is specific. Only specific bad debts are allowable – not a general
deduction (for example percentage of taxpayer’s debts).

Bad debts recovered are taxed as a recoupment in terms of section 8(1)(j).

Debts which are purchased with a business or acquired with an inherited business which
subsequently become bad are not allowable deductions as they were never included in the
taxpayer’s income in the past. Legal expenses incurred in the recovery of allowable
debts are allowable deductions.

5.3.5 Section 15(2)(h) – Pension Fund Contributions 6th Schedule

The allowable deductions in respect of pension contributions will be covered in unit 12.

5.3.6 Section 15(2)(j) – Medical Aid Contributions

Contributions made by employers to benefit the employees and their dependants are an
allowable deductions in their hands. Medical aid contributions by the employer are not
taxed in the hands of the employee as the 3rd schedule qualifies them as exempt.

5.3.7 Section 15(2)(m) – Experiments and Research

Any expenditure incurred during the year of assessment on research or experiments

related to taxpayer’s trade is allowed. Once again, expenditure of a capital nature for
example cost of equipment, machinery, land is not allowed specifically.
5.3.8 Section 15(2)(n) – Experiments and Research

Where research expenditure is incurred by a third party to whom a contribution is made, a

proportion of the contribution is allowed to the taxpayer. The proportion is determined
by applying the following formula:-

AxB
C
A = the taxpayer’s contribution
B = amount of expenditure incurred by the third party which would have been
allowed as deduction in terms of paragraph (m) had it been incurred by the
taxpayer (that is revenue expenditure).
C = amount of total expenditure incurred by the third party (that is capital and
revenue expenditure) in carrying out experiments and research.

5.3.9 Section 15(2)(o) – Scientific Research and Experimental Work

Any sum contributed to approved scientific or educational bodies with the condition that
they be used solely for industrial research or scientific experimental work connected with
the taxpayer’s trade.

5.3.10 Section 15(2)(p) – Educational Grant

Any sum contributed by the taxpayer in the form of a grant, bursary or scholarship to
enable anybody, who is not a near relative of the taxpayer to take a course in technical
education related to his trade is allowed as a deduction. No deduction is allowed if the
person taking up the course is a near relative (as defined in Section 2) of the taxpayer.
Note that a cousin is not a near relative.

5.3.11 Section 15(2)(q) – Voluntary payments to former employees and / or their

dependents

Any amount paid during the year of assessment by way of an annuity, allowance or
pension is deductible subject to the following:
 the employee must have retired because of ill-health, infirmity or old age
 the amount allowed is restricted to $500 per tax year for each former employee
 in the case of payments to dependents or persons who were dependant on a retired or
deceased former employee the annual restriction is $200 in respect of all dependants
of each ex-employee.

In all cases the amount allowed is reduced by any obligatory payments (for example
pension or annuity) received during the year by the ex-employee or dependent from any
fund of the former employer. Persons whose employment was of a domestic or private
nature are excluded in all contexts.
5.3.12 Section 15(2)(r) – Donations

A deduction shall be granted for payments made to the National Scholarship Fund,
National Bursary Fund or a trusts administered by the Minister responsible for either
Social Welfare or Health.

i. Section 15(2)(r1) – Donations

Any amount not exceeding $100 000 paid by a taxpayer during the year of assessment to
the state or to a fund approved by the Minister of Health for, any of the following
operated by the state, local authority or religious organisation:-
 the purchase of medical equipment
 the construction, extension or maintenance of a hospital or
 the procurement of hospital drugs (including ARVs)

ii. Section 15(2)(r2) – Donations

Any amount not exceeding $100 000 paid by a taxpayer during the year of assessment,
without any consideration at all, to a research institution approved by the Minister
responsible for higher or tertiary education.

iii. Section 15(2)(r3) – Donations

Any amount not exceeding $100 000 paid by a taxpayer during the year of assessment,
without any consideration at all, to the state or a fund approved by the Minister
responsible for education, for any of the following operated by the state, local authority
or religious organisation:
 the purchase of educational equipment
 the construction, extension or maintenance of a school
 the procurement of school books or other educational materials

iv. Section 15(2)(r4) – Donations

Any amount not exceeding $50 000 paid by a taxpayer during the year of assessment
without any consideration to the Public Private Partnership Fund.

v. Section 15(2)(r5) – Donations

Any amount not exceeding $50 000 paid by a taxpayer during the year of assessment
without any consideration to the Destitute Homeless Persons Rehabilitation Fund
established by the Ministry of Finance under the Audit and Exchequer Act.

Activity 5.3
Mrs. Busy runs a very successful business at a growth point area in Mashonaland West.
She is thinking of ploughing back to the society by way of donations. She approaches
you for advice so that whilst she is donating she will also minimise her tax liability.
Discuss.

vi. Contributions to a local authority

For maintenance of bridges, roads, buildings, sanitation works, water works,
public parks or any other utility or infrastructure upto a maximum of $50 000.

5.3.13 Section 15(2)(s) – Subscriptions

A deduction is allowed for subscriptions paid by a taxpayer in respect of his continued

membership to any business, trade, technical or professional association. Entrance fees
are not allowable.

5.3.14 Section 15(2)(t) – Expenditure incurred prior to commencement of business

(preliminary expenses)

A deduction is allowed from business income, which

 was incurred by the taxpayer, within 18 months prior to commencement of business,
in the course of establishing the business, and
 would have been allowed as a deduction had it been incurred after beginning the
business, that is revenue expenditure for example salaries, rates, advertising and so
on and
 is claimed in the year of assessment in which business commences

5.3.15 Section 15(2)(u) – Opening Stock

Allows the deduction of the value of opening stock. The value for opening stock would
be the same as the closing stock for the previous year.

5.3.16 Section 15(2)(v) – Trading stock acquired other than in the ordinary course
of trade

Allows a deduction in respect of trading stock acquired otherwise than in the ordinary
course of trade (for example by inheritance or donation).

In the case of inheritance, the amount allowed as a deduction (deemed cost) is the value
approved by the Master of the High Court / Commissioner as shown in the Final
Liquidation and Distribution account of the deceased.

In the case of a donation, the amount allowed must not exceed the amount which would
have been allowed as a deduction (deemed cost) to the person from whom the stock was
acquired had it been sold by that person in the ordinary course of trade or what the
Commissioner considers to be fair and reasonable (that is the donor’s valuation figure
which would also have been included as income in his hands at the time of donation.) If
the donor was not a taxpayer the deemed cost is what the Commissioner considers to be
fair and reasonable.
Example

1. Mr. A, a livestock farmer, inherited two cows from his late uncle Mr. Y. The
following information is given:-

Mr. Y’s cows Mr. A’s Cows

Fixed standard value $700 each $850 each
Master’s valuation of the cows $800 each

The amount to be allowed as a deduction to Mr. A. is based on the Master’s

valuation, that is $800 per cow.

2. Mr. C. donated two cows to Mr. D. The following information is given:-

Mr. C’s cows Mr. D’s cows
Fixed standard value $800 each $850 each

The fair market value of each cow at the date of donation was $875. The amount
to be allowed as a deduction to Mr. D. is $800 per cow. The value must not
exceed the value which would have been allowed to Mr. C. had he sold the cows
in the ordinary course of trade.

5.3.17 Section 15(2)(w) – Conventions and Trade Missions

The cost of attending a convention or trade mission is allowed as a deduction subject to

the following:-

 the deduction is restricted to $2 500 of the amount spent in any one tax year and must
relate to not more than one convention, which in the opinion of the Commissioner
was in connection with the trade carried on by the taxpayer or one trade mission,
approved by the Minister.

 if the convention or trade mission commences in one year of assessment and ends in
another the deduction is allowed in the tax year it ends

 if the person attending is a member of a partnership and the partnership bears the
expense, each partner is allowed to deduct an amount in proportion to his share of
profits. In such a case the limit of $2 500 is applicable to one visit by each partner

5.3.18 Section 15(2)(aa) – High Court Legal Costs

Taxpayers who appeal against any decision made by the Commissioner and whose appeal
is allowed in full in the Special Court of the High Court, may deduct their legal costs
(allowed by the registrar or the court as being in accordance with the proper scale for
such costs) in the year of assessment in which the costs are so “taxed”. If the appeal is
allowed to a substantial degree, the court may direct that the costs be deductible.

5.3.19 Section 15(2)(bb) – Legal Costs on Income Tax Appeals

Should an appeal be taken further (by either party) to the Supreme Court, and the
taxpayer’s case be upheld in full or to a substantial degree the court may, at its discretion,
permit the costs to be deducted.

5.3.20 Section 15(2)(cc) – Expenditure not yet incurred

If the taxpayer so elects, which election shall be bidding, this section permits the
deduction of an allowance based on an estimate of the expenditure or losses to be
incurred in future years which will be directly related to income received or accrued in
the current year of assessment, that is income in advance.

The allowance is reduced by the amount of the expenditure incurred in the current year in
respect of income that will accrue or be received in a future year. The allowance will be
included in the taxpayer’s gross income in the following tax year.

5.3.21 Section 15(2)(gg) – Export market development expenditure

Export market development expenditure is allowed as a deduction under this section

besides being allowed under section 15(2)(a). The effect of this is that a taxpayer will get
a double deduction in respect of such expenditure ie.200%.

The definition of “export market development expenditure” is given in the Act. The
following should be noted:
 all capital expenditure does not qualify
 the expenditure must be “wholly or exclusively” incurred for the purpose of seeking
opportunities for the export of goods from Zimbabwe or of creating or increasing the
demand for such exports

The expenditure includes costs incurred for any of the following purposes:-

 research into, or the obtaining of information relating to markets outside Zimbabwe

 research into the packaging or presentation of goods for sale outside Zimbabwe
 advertising goods outside Zimbabwe or securing publicity outside Zimbabwe for
goods
 soliciting business outside Zimbabwe or participating in trade fairs
 investigating or preparing information, designs, estimates and other material for the
purpose of submitting tenders for the sale or supply of goods outside Zimbabwe

5.3.22 Section 15(2)(hh) – Tobacco Levy

The amount of any tobacco levy paid in the year of assessment in terms of Section 36A.
 5.3.23 Section 15(2)(jj) – Fair values of stocks

Any amount representing the fair value of any stock, shares, debentures, units or interest
paid or given by the taxpayer to an employee under a share ownership scheme is allowed
as a deduction.

5.3.24 Section 15(2)(kk) – Maintenance on behalf of local government

Expenditure not exceeding $50 000 approved by the Minister responsible for local
government on the maintenance of buildings, roads, bridges, water works, sanitation
works, public parks and any other utility, amenity or item of infrastructure.

5.3.25 Section 15(2)(ll) – Contributions or donations by a taxpayer to a community

share ownership trust or scheme established by the taxpayer in compliance with the
indigenization and economic empowerment act (Chapter 14:33)

5.4 Section 15(3) – Assessed losses

An assessed loss, as defined in Section 2, arises when the deductions exceed income, this
is the reverse of taxable income.

Allows the deduction of any assessed loss determined at the end of the previous year of
assessment. This section does not apply when the taxpayer has been declared insolvent
or has made an assignment of his property or estate for the benefit of his creditors.

An assessed loss cannot be carried forward for more than six years except if a person is
carrying on mining operations. For example, a loss established during the year ended 31
December 2009 cannot be carried forward after 31 December 2014. The losses are
written off on a first come basis.

Generally losses cannot be passed from one taxpayer to the other. The following are
exceptions:-
i. it permits the transfer of an assessed loss from one taxpayer to another in the case
of a foreign incorporate company, having carried on its principal business in
Zimbabwe, being voluntarily wound up and transferring its business to a
Zimbabwean company, the member shareholdings being exchanged for shares in
the new company (proviso iii)
ii. Proviso (v) permits the transfer of an assessed loss upon conversion of a company
into a private business corporation or vice versa.

5.5 Section 15(4) – Choice of section

 Where a deduction is allowable under two or more sections the taxpayer shall elect under
which section he wants the deduction allowed for example lease improvements or capital
allowances.

5.6 Section 15 (8)

No assessed loss attributable to business operations carried on by a taxpayer shall be

allowed as a deduction from income received by or accruing to him under a contract of
employment.

5.7 Section 16: Prohibited Deductions

While the “general deduction formula” contains its own restrictions further restrictions on
deductibility arise under this Section, parts of which forbid a deduction despite the
expense passing the tests of purposes of trade, non-capital nature, and so on. Other parts
merely ensure a disallowance of certain items of expenditure, the deductibility of which
might be in doubt.

It is for this reason that no deduction shall be allowed in respect of the following
expenditures:-

 the cost incurred in the maintenance of the taxpayer, his family or establishment.
 domestic expenses, including travel between home and place of business or between
two entirely distinct trades. A taxpayer, who carries on trade at home and travels to
other places where he carries on the same trade may avoid both of these prohibitions.
Domestic expenses include wages paid to a domestic servant who was recruited to
enable the taxpayer’s wife to take up employment.
 any loss or expense, which is recoverable under any contract of insurance or
indemnity.
 tax payable and interest thereon.
 income carried to any reserve fund or capitalized in any way. The Commissioner
accepts, however, that specific provisions for director’s fees and staff bonuses are
deductible subject to the following conditions, that is
o that they are voted by the date of the relevant accounts or annual general
meeting and
o that they accrue for tax purposes in, at the latest, the year of assessment after
that in which they are claimed as a deduction.

Also deductions in respect of liabilities for staff leave pay are allowable if they satisfy the
test that they have been “incurred” and despite their being termed “provisions”.

 Expenditure incurred in the production of exempt income; unproductive interest is also

not allowed for example Mr. S. Trader obtained a loan of $200 000 from the bank. He
advanced $50 000 to his son interest free. He paid interest of $20 000 on the loan.
Unproductive interest (UPI) = $50 000 x 20 000 = $5 000
20
 Contributions to unapproved funds.
 Interest which might have been earned on capital employed in trade.
 Rent of, or cost of repairs to, premises not occupied for the purposes of trade
 Expenditure incurred by the taxpayer for the purpose of restraining any other person from
selling goods other than goods supplied to him by the taxpayer.
 Expenditure incurred by a taxpayer in leasing a passenger motor vehicle, as defined in
paragraph 14(2) of schedule 4 is restricted to $10 000 in total during the lease period..

 The cost of any shares awarded to an employee, including the director, by the company.

 Any expenditure incurred on entertainment. Entertainment is defined as including

“hospitality in any form”. The Commissioner accepts deduction of canteen meals
provided for workers, staff Christmas parties and office teas.

 Expenditure incurred in the production of dividends from shares in foreign companies.

Foreign dividends are included gross in taxable income without deduction of any relevant
expenses such as bank charges, agents fees.

 Expenditure incurred in the production of interest from the bank, discount house or a
building society – that is no expenses are allowed as a deduction from special rate
interest.

 Any expenditure incurred by a local subsidiary of foreign company in servicing a debt in

connection with trading operations to the extend that the debt exceeds a debt to equity
ratio of three to one (3:1).

Activity 5.4

Bulldozer Pvt Ltd is a small company engaged in the production of cement for local
consumption. It has 20 employees. You are presented with the following information for
each of the specified tax years before making adjustments to results of prior years.
$
2010 assessed loss carried forward 60 000
2011 assessed loss 52 000
2012 taxable income 71 000
2013 assessed loss 12 000
2014 taxable income 64 000
2015 loss 30 000
2016 net profit 108 000

Additional information
Net profit for 2016 is arrived at after charging the following:-
 depreciation $32 000
 donation to national bursary $14 000
 donation to local church $8 000
  medical aid contribution $5 600
 trade mission cost $4500
 pension fund contribution for 20 employees $80 000
You are required to indicate the final tax position of Bulldozer for year ended 31
December 2016.

Solution
$
2010 loss carried forward 60 000
2011 loss (52 000)
loss carried forward (112 000)
2012 taxable income 71 000
loss carried forward (41 000)
2013 loss (12 000)
loss carried forward (53 000)
2014 taxable income 64 000
adjusted taxable income 11 000
2015 loss (30 000)
assessed loss carried forward (19 000)

2016 Taxable income computed below:

+ -
Profit per accounts 108 000 -
Depreciation 32 000 -
Donation to national bursary fund - -
Donation to a local church 8 000 -
Medical aid contributions - -
Trade mission
(maximum allowed 2500 ) 2 000 -
Pension fund contributions - -
150 000 Nil

Taxable income $150 000

Less: assessed loss b/f (19 000)
Adjusted taxable income $131 000

5.8 Summary
In this unit we covered the allowable deductions covered under the general deductions
formula which is very general and it excludes expenditure of a capital nature. We also
covered items which are specifically allowed as deductions regardless of the fact that
they might be of a capital nature. What is important is the fact that the expenses must be
incurred, not necessarily paid, for the purposes of trade only.